The Chicago Board Option Exchange (CBOE) proposed a rule change on December 12, 2006 to unilaterally extinguish the contractual rights of Chicago Board of Trade (CBOT) Full Members as defined in the Article Fifth(b) of the CBOE’s Certificate of Incorporation.

CBOT Full Members provided the original funding, staff and trading facilities for the CBOE. The CBOE recognized the importance of the CBOT and the Full Members in the development of the CBOE and the options markets by compensating each CBOT Full Member with an Exercise Right Privilege (ERP). The two exchanges have documented the contractual right of a CBOT Full Member ERP to exercise their right to participate in CBOE business activities as a CBOE ERP Member. The defined business activities of the CBOE ERP Member are substantively identical to the CBOE Regular Member. The business activities include the rights held by a CBOE Member including access and trading rights to the CBOE trading floor/markets. In addition, the CBOE ERP Member has a contractual right to participate equally in financial benefits such as a cash distribution and/or a stock distribution resulting from an organizational restructuring. A demutualization of the CBOE would clearly be an organizational restructuring. An organizational restructuring does not preclude an entity from honoring contractual obligations.

The proposed rule change attempts to extinguish the contractual right of the CBOT Full Member as previously documented in the CBOE’s Certificate of Incorporation, the Agreement of 1992 and the Agreement of 2001. In fact, the proposed rule change knowingly attempts to circumvent the spirit of said agreements.

Extinguishment of the CBOT Full Member ERP will result in a significant financial benefit to CBOE Members and a significant financial loss to CBOT Full Members. Additionally, the extinguishment of the CBOT Full Member ERP right will negatively impact the CBOE market place by reducing market liquidity provided by CBOE ERP Members involved in the option markets.

As a CBOT Full Member, I oppose the proposed rule change. The pending merger between the CBOT and Chicago Mercantile Exchange (CME) does not relinquish the CBOE from contractual obligations with the CBOT and each CBOT Full Member. The contractual disputes outlined by the CBOE should be addressed and resolved in a court of law.

Thank you for the opportunity to express my opinion and concern on this matter.